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Co-op Memo: PPP Eligibility

A number of our clients have asked us to analyze whether Housing co-ops are eligible for the Paycheck Protection Program (“PPP”).1 On April 2, the Small Business Administration (“SBA”) issued its Interim Final Rule (“IFR”), meant to give guidance as to the implementation of the PPP. 

The IFR describes which businesses are ineligible for the PPP. The IFR states that ineligible businesses are identified in the Code of Federal Regulations (“CFR”) 120.110 and described further in the SBA Standard Operating Procedure 50 10, Subpart B, Chapter 2 (the “SOP”). 

CFR 120.11 states, in relevant part, that included as ineligible are “passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds.” 

The threshold question is whether co-ops are “passive businesses.” The SOP defines passive businesses. It states, in relevant part, that “apartment buildings are not eligible.” It further states that “businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible.” The SOP lists, by way of example, shopping centers, salon suites and similar business models. 

The first question is thus whether “apartment buildings” as described in the SOP includes co-ops. Most co-ops do more than simply own an apartment building. They manage, operate and maintain the building, often in conjunction with a management company. They often own commercial space and work, in conjunction with commercial brokers and other professionals, to find appropriate tenants for that space. They engage in contracts with third parties to generate revenue for the corporation. 

As described above, co-ops are not primarily engaged in owning and purchasing real estate for the purpose of leasing. The list of example businesses is instructive. A shopping center solely derives passive income from is tenants. That is clearly not the case with co-ops where the owners live in the corporation’s core asset – the residential space – and depend on corporate employees to maintain and improve that asset. 

The SOP’s definition aside, co-ops cannot be properly understood as passive businesses. Cooperative housing corporations in New York are organized under the Business Corporation Law of the state, and operated with largely the same expenses as any other small business, including staff wages, utility payments, and mortgage interest. Unlike passive “owners” and “developers”, Co-ops are composed of active “Managers” and “Operators.” 

Even if co-ops are “passive businesses” within the meaning prescribed by the SOP, it is arguable that they do not meet the second prong of the definition laid out in CFR 120.11: “that they are owned by developers and landlord that do not actively use or occupy the assets acquired or improved with the loan proceeds.” (emphasis added) 

For one, co-op assets are not owned by “developers” or “landlords,” but rather by shareholders. These shareholders actively use and occupy the building. It is arguable that the building, i.e. “the assets,” would be improved by the loan proceeds. The loan proceeds are intended to be used to pay employees. Co-op employees maintain, repair, and to a limited extent, improve the building. It is unclear whether same rises to the level of “improvements” under the CFR. 

What is clear is that the PPP, is intended to broaden the scope of the SBA 7(a) loan program. For example, the SOP states that non-profits are ineligible for SBA loans under CFR 120.10, whereas the PPP explicitly states that they are. Moreover, the program requirements of the PPP temporarily supersede any conflicting Loan Program Requirement (as defined in 13 CFR 120.10). This broader scope is clearly related to the government’s interest in keeping individuals employed. Accordingly, while co-op eligibility under the PPP is uncertain, a plain reading of the IFR, CFR and SOP presents a sound, good faith basis for co-ops to apply when that co-op maintains employees on its payroll. 

Given the foregoing and the limited funds available under the program, we think it prudent for those co-ops which maintain employees on payroll and are undergoing economic distress due to the pandemic to apply for a PPP loan. That being said, a number of attorneys and other organizations have concluded that co-ops are not currently eligible. You should speak to co-op counsel and other professionals before submitting an application for the PPP or any other loan product as there are a number of other factors aside from eligibility which should be considered. We recommend that in the event a co-op decides to apply, it should be accompanied by an opinion letter from counsel. 

1 Much of our analysis applies equally to condominiums.

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